Tuesday, 3 January 2017

Lien Pitfall – Transfers of Land

When a transfer of title takes place, it is possible that builders’
lien claimants automatically lose their builders’ lien rights. This is
another Builders’ Lien Act trap for the unwary.

If a lien is registered before the transfer of land, it will survive
the transfer. (Or more likely, the transfer will be delayed until the
lien is discharged.) However, if the transfer of land occurs after lien
rights arise, but before the contractor or supplier registers a lien,
then lien rights are at risk. That is because only a statutory “owner”
is subject to lien claims. If the purchaser did not request the work to
be performed or materials to be supplied and was not otherwise an active
participant in the construction project, then the purchaser is not an
“owner” within the statutory definition.

Example 1 – Residential Construction
By way of an example,
a residential home purchaser had an agreement with the developer that
he would construct and deliver the home to them. The developer owned the
land in question and contracted to have the home built. When the home
was completed, title was immediately transferred to the purchaser. The
builder did not get paid by the developer and registered a builders’
lien. Notwithstanding the fact that the lien was registered in time, the
court declared the lien to be invalid. The purchaser was not an “owner”
(as that term is defined in the Act). The builder still had a right to sue the developer for payment, but the builder had no lien rights.

The Test – Statutory Definition of “Owner”
In the Builders’ Lien Act, the following definition applies:

…“owner” means a person having an estate or interest in land at whose request, express or implied, and

on whose credit,

on whose behalf,

with whose privity and consent, or

for whose direct benefit,

work is done on or material is furnished for an improvement to the
land and includes all person claiming under him whose rights are
acquired after the commencement of the work or the furnishing of the
material…

This definition, like much of the Builders’ Lien Act, is badly in need of translation into simple English.

Whether or not someone with an interest in land meets this antiquated
statutory definition of “owner” will almost always fall to be
determined on the question whether they expressly or impliedly requested
the work. That is, were they active participants in the construction
project? In the example above, the purchaser simply contracted to buy a
completed house, and there was no evidence that (for example) they
directed any changes during construction, so the court concluded that
they were not sufficiently involved in the construction project to meet
the statutory definition; simply speaking, they did not request the
work.

Example 2 – Commercial Construction
This issue seems to come up most often in new home construction, but it can occur on any construction project. In our second example,
a commercial contractor registered its lien on time, but not before the
land had been transferred to a purchaser. The purchaser approved the
specifications for the building, made requests (through the vendor) for
changes during construction, and had a representative on the
construction site from time to time. But the court held this was still
insufficient to meet the statutory definition of “owner.” Where the
party with an interest in the land (i.e. the purchaser) is not a party
to the construction contract(s), it must be shown that they otherwise
“actively participated” in the construction process so as to meet the
statutory definition of “owner.”

Practical TipThe practical consequence is that contractors, subcontractors and
suppliers must be aware of any situation where the interest in land they
are working on is likely to be sold or otherwise transferred. If a
developer transfers title during construction or immediately after
completion – to a purchaser who isn’t actively involved in the
construction process - unregistered builders’ lien rights are lost. In
appropriate circumstances, this might mean that it is desirable to
register a lien before the transfer takes place, in which case the lien
survives the transfer. Since this will usually have the effect of
holding up the transfer completely, this should be done only after
giving due consideration to the consequences. In other circumstances,
this might mean it is prudent to seek other forms of security for
payment at the outset

Disclaimer

All posts made to this blog are a general overview of the subject matter and cannot be regarded as legal advice.Please contact Corbin Devlin or any member of our Construction Industry Group for advice on this or any other construction related topic.